Outgrown a SIMPLE-IRA? Suggest Switching to a Safe Harbor 401(k) and Amp up Contributions

In September or October, it’s time to start considering whether your SIMPLE-IRA clients should switch from a SIMPLE-IRA to a Safe Harbor 401(k) for the next year.

Most sponsors and advisors understand that you can’t switch from a SIMPLE-IRA to a Safe Harbor 401(k) mid-year because (a) a SIMPLE-IRA must be sponsored for the entire calendar year, and (b) no other retirement plan can be sponsored in the same calendar year as a SIMPLE-IRA.

However, in order to switch to a 401(k) plan in the next plan year, guidance from the IRS on terminating SIMPLE-IRAs states that the plan sponsor must distribute a notice to employees by November 2 of the current plan year that explains that the SIMPLE-IRA will be discontinued effective January 1, 2019.

Increasing retirement contributions

For those successful small business owners who want to save more than $12,500 a year, as allowed by the SIMPLE IRA ($15,500 if the owner is age 50 plus), a 401(k) plan’s higher deferral rates ($18,500/$24,500) generally outweigh the modest administrative fees associated with a 401(k) plan.

Consider a company currently sponsoring a SIMPLE-IRA with a 3% match. The participants are the owner and spouse, each age 50, and three non-owner employees. With the SIMPLE-IRA, they could defer a combined total of $31,000. If they switched to a 401(k) plan with a Safe Harbor match capped at 4%, for that extra 1% of match they could defer a combined total of $49,000 – this increases by more than 50% the amount they could save annually. By the time they reach age 65, they potentially could save an additional $255,000 compared to continuing with the SIMPLE-IRA (this is without considering future cost of living increases to the deferral limits or investment gain on the increased amount).

So, if your client currently sponsors a SIMPLE-IRA, but is looking to increase contributions, it’s important to review your clients Safe Harbor 401(k) options now so they can make a decision before November 2.

Benetech’s role is to provide the plan sponsor up-front consulting on plan design, plan documents, and excellent ongoing support for plan operation, testing and reporting. Each plan is assigned to a knowledgeable Benetech retirement specialist, who is the plan’s principal point of contact.

If you are interested in requesting a fee quote or contribution illustration, we now have proposal request forms available online. Simply go to our Request a Proposal page, and click through the form links. You can access these forms from your laptop, tablet or mobile device.

Supercharge a 401(k) by Adding a DB Plan

Adding a Cash Balance or Traditional Defined Benefit Pension Plan to an existing 401(k) Plan could add $200,000 or more in annual contributions to your client’s or prospect’s existing retirement program.

Retirement Plan Design for Professional Practices

Successful medical, law and other professional practices tend to remain profitable during economic downturns and remain good candidates for plan designs that target owners with high annual contributions.

Using CPE to Strengthen CPA Relationships

CPAs can be an excellent referral source. Offering CPE programs is an opportunity to deepen an existing relationship, or to develop new CPA relationships.

Prospecting Owner-only Businesses

Successful owner-only businesses are an often overlooked segment of the retirement plan market. For example, an Owner DB may have annual contributions of up to $200,000!

Is your client or prospect looking for higher tax deductions? Are they fully funding their SEP or 401(k} plan? December 31st will be here before you know it. The fourth quarter is a time to review your clients’ or prospects’ retirement objectives to make sure they do not miss the opportunity to implement a new plan or upgrade an existing plan before year end.

Contact us if you are interested in more details about Year End Retirement Plan Opportunity events for the coming year.